Common Entity Types
| Structure | Definition | Key Features |
|---|---|---|
| Sole Trader | Individual business owner, simplest setup | Minimal compliance, taxed at individual marginal rates, full liability. |
| Pty Ltd (Proprietary Limited) | Separate legal entity | Limited liability, corporate tax rates, must comply with ASIC reporting. |
| Trust (Discretionary/Family Trust) | Entity holds assets for beneficiaries by trustee | Flexibility in income distribution, potential tax benefits, more complex administration. |
Tax Planning Considerations
- Marginal vs company tax rates: Corporate rate sits around 25–30% depending on turnover and eligibility for aggregated turnover concessions. Transferring profits out via dividends attracts franked dividend rules. |
- CGT consequences: When disposing assets, trust or company structures affect who pays and whether CGT discounts apply. Individual trusts may access 50% discount; companies do not. |
- Super obligations: As an employer in any structure, super guarantee obligations continue—now per payday. |
- Compliance and costs: Pty Ltd and trusts require more annual reporting (ASIC, ATO); sole trader simpler but higher personal risk. |
Practical Scenarios
- Startup tech-company expecting high profits: Pty Ltd may offer lower corporate tax rate and ability to distribute dividends with franking credits. |
- Family business passing income to low-income beneficiaries: Discretionary trust enables streaming so that beneficiaries with lower rates receive more income. |
- Low capital, single person business: Sole trader easier, less compliance burden. |
Steps to Decide and Implement
- Forecast revenues and profit over next 3-5 years. 2. Project liability vs benefits under different structures. 3. Engage a tax advisor to model scenarios, including impacts under company and trust law, fringe benefits, etc. 4. Set up entity properly: ABN, tax registrations, trust deeds, ASIC compliance. 5. Reassess annually: pivoting business may benefit from switching structure later. |
Example Comparison
- Company option: Startup with A$5M turnover, using company tax rate. After profits, distributing dividends shelters via franking credits. |
- Trust option: A family trust pays profits to beneficiaries, optimizing for marginal tax rates; perhaps redeeming capital gains discount. |
- Sole trader: Owner retains all profits but pays top marginal rates and personally liable for debts. |
Related Policy & Regulatory Context
Changes like Payday Super affect all entity types as employer; this reinforces the need for timely super payments by any business structure. The Paid Parental Leave Superannuation Contribution (PPLSC) law also means employer-equivalent payments get concessional super treatment; affects entity structuring. (ato.gov.au)
Core insight: Choosing entity structure is more than legal form—it's about aligning tax exposure, liability risk, revenue projections, and compliance overhead. With evolving rules, periodic review is just as important as proper setup.